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PE firms tear up their betting slips as Gala Coral deal falls over

The UK gambling group has been taken over by its debtors, leaving three buyout groups with huge losses.

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Published: 22 Jun 2010

Last Updated: 31 Aug 2010

You’d have thought that owning a gambling business would be a licence to print money – particularly now, with all this sport going on. Well, that was clearly what UK buyout firms Candover, Cinven and Permira thought when they took Gala Coral private a few years back – but now all three have been forced out by the group’s junior lenders as part of a restructuring, in which they’ll lose almost all the money they invested. Gala Coral is actually still a profitable business – but its private equity owners loaded it with a debt that it couldn’t manage when times got tough. What are the chances…

Coral betting shops have been ‘adorning’ our high streets since the 1960s, and its merger with Gala (best known for casinos and bingo) in 2005 took its total number of retail outlets above the 2,000 mark. The tie-up was masterminded by PE firms Candover and Cinven, who had snapped up Gala for £1.24bn in 2003, and Permira, which bought in just before the merger. The combined group was valued at about £4bn, making it the biggest leveraged buyout of its type in Europe at the time.

However, despite some early successes, things have gone distinctly pear-shaped – partly thanks to the recession, although things like the smoking ban haven’t helped. The three firms borrowed heavily to make the deal happen: Gala Coral was left sitting on a debt pile of £2.6bn, and when profits started falling, it struggled to service this debt. Now it’s agreed a restructuring that will see its junior debt holders (four US distressed debt specialists) write off £588m and inject £200m in exchange for full control of the company, whose total debt pile will now drop to a (slightly) more manageable £1.9bn as a result.

It’s by no means curtains for Gala Coral; in fact, exec chairman Neil Goulden was very bullish about the group’s prospects now it’s got its balance sheet sorted out, pointing out that its profits have actually dipped less than most of its major rivals. It still has a massive high street and online presence, some well-known brands, and (finally) some cash to invest in the business. There’s even talk of a float within a few years.

No such luck for the poor old PE lot, however. Rumour has it that they pumped in somewhere between £600m and £1bn between them; they’ll now leave, Weakest Link-style, with nothing (more or less). But somehow we doubt they’ll get much sympathy. This looks like a classic case of a business that was overloaded with too much debt in the good times, and is paying the price now things have cut up rough. A debt burden like this might benefit the owners (who can pay themseleves a juicy divi) but it doesn’t do the company much good because it spends all its money servicing debt rather than investing. Now its handicap has been reduced, the going should hopefully be easier for Gala Coral.